Doing the splits

When is a split not a split? When it’s a subsidiary, of course. We learn this morning that the Vickers Banking Commission will not recommend a complete, Glass-Steagall-style separation of retail and investment activities. But it will advise that banks erect some sort of barrier between the two, to ensure that everyday savers’ (and taxpayers’) cash isn’t risked by the Masters of the Universe. Specifically, it will propose that banks create subsidiaries out of their investment arms. Those subsidiaries could then go bust without, in theory, affecting the retail half of the equation.

As Robert Peston explains, there are two ways of implementing these subsidiaries — and the Vickers Commission is expected to hurl them both out into the realm of public debate. The first is to make them a permanent feature of the banking landscape, operating whether the economy is in good health or no’. And the second is to create them In Case of Emergency Only. The banks would prefer the latter, as it would make it easier and cheaper for them to raise capital for their investment activities. While the Lib Dems would certainly prefer the former, as its permanence matches the Glass-Steagall type policy that they had hardwired into their manifesto.

But what about the Conservatives? My guess is that they wouldn’t be disinclined towards the former either. They may have spoken out against a formal separation of retail and investment banking, but the White Paper that they released in Opposition was shot through with Glass-Steagall thinking. Here, for instance, is one passage that caught my eye at the time:

“A Conservative Government will empower the Bank of England to impose much higher capital requirements on high risk activities such as large scale proprietary trading carried out by banks that also take retail deposits. In practice this could prevent banks that take retail deposits from engaging in many of these high risk activities by making them more expensive.”